FDlct NEWS RELEASE
FEDEIAL DEPOSIT INSURANCE CORl'ORATION
FOR IMMEDIATE REI.FASE PR-216-88 (11-19-88)
SAVINGS BANKS DOING WELL, BUT
SOME STORM WARNINGS ARE UP, SEIDMAN SAYS
While savings banks continue to earn strong profits, and have made gocxl
progress in their ability to handle interest rate risk, some danger signs
have developed. that merit the in::iustry's attention, Federal Deposit Insurance
Corporation Chairman L. William Seidman said.
In remarks to the New York Savings Bank Association, Mr. Seidman
identified the following warning signals:
• Net charge-offs remain low but seem to be rising;
• Nonperforming loans are increasing;
• The industry's high rate of asset growth is outpacing capital
expansion.
Mr. Seidman noted that some institutions are exposing themselves to
rate and funding risk through increased reliance on repurchase agreements,
out-of-area deposits and jumbo certificates of deposit. He conunended the
savings banks for their progress in reducing their vulnerability to long term
interest rate shifts. However, he recommended the industry give more
attention to short term interest rate changes.
"More effort could be made to restructure portfolios to reduce the
imbalances, including through the development of new adjustable-rate
products," Mr. Seidman said. Securities transactions, he noted, could be
tailored to reduce rate sensitivity. Mark-to-market accounting is another
good approach, Mr. Seidman said.
FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St., N.W., Washington, D.C. 20429 • 202-898-6996
FEDEIAL DEPOSIT INSURANCE CORl'ORATION
FOR IMMEDIATE REI.FASE PR-216-88 (11-19-88)
SAVINGS BANKS DOING WELL, BUT
SOME STORM WARNINGS ARE UP, SEIDMAN SAYS
While savings banks continue to earn strong profits, and have made gocxl
progress in their ability to handle interest rate risk, some danger signs
have developed. that merit the in::iustry's attention, Federal Deposit Insurance
Corporation Chairman L. William Seidman said.
In remarks to the New York Savings Bank Association, Mr. Seidman
identified the following warning signals:
• Net charge-offs remain low but seem to be rising;
• Nonperforming loans are increasing;
• The industry's high rate of asset growth is outpacing capital
expansion.
Mr. Seidman noted that some institutions are exposing themselves to
rate and funding risk through increased reliance on repurchase agreements,
out-of-area deposits and jumbo certificates of deposit. He conunended the
savings banks for their progress in reducing their vulnerability to long term
interest rate shifts. However, he recommended the industry give more
attention to short term interest rate changes.
"More effort could be made to restructure portfolios to reduce the
imbalances, including through the development of new adjustable-rate
products," Mr. Seidman said. Securities transactions, he noted, could be
tailored to reduce rate sensitivity. Mark-to-market accounting is another
good approach, Mr. Seidman said.
FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St., N.W., Washington, D.C. 20429 • 202-898-6996
''We have seen sane darger signs in asset quality developing as some of
you have increased out-of-area lending, leveraged buyout financing, and
off-balance sheet activity," Mr. Seidman said. "The bottom line is we are
happy how well thirgs are going for your banks. But we hope you will keep on
top of these issues."
'Ihe financing of leveraged buyouts is becoming popular among financial
institutions, and the extent to which individual institutions are exposed
will be scnrtinized by FDIC examiners, Mr. Seidman said. He noted that LBOs
represent almost 10 percent of all connnercial loans at some major banks--a
lending concentration that may become a major risk to the financial system
during an economic downturn.
"'Ihis is certainly an area we. all need to pay closer attention to, " Mr.
Seidman said. Bank lending for LBOs now stands at about $150 billion, or
about one-half of the LBO debt assumed by corporate America.
"LBO lending has filled the gap in loan demand for many banks created
by the near-disappearance of what had been three major markets:
energy-related lending, certain real estate lending, and loans to
lesser-developed countries," Mr. Seidman said. He acknowledged that LBO
lending has been profitable, but he added that it also "poses significant
risks if in an economic downturn borrowers no longer have the cash flow to
support their debt."
A recent survey of 1,500 corporations conducted by Princeton University
indicated that about 150 of the respondents could go bankrupt during an
economic downturn due to unserviceable debt. "To the extent these
bankruptcies result in bank failures, these problems will end up on the books
of the FDIC," said Mr. Seidman.
###
you have increased out-of-area lending, leveraged buyout financing, and
off-balance sheet activity," Mr. Seidman said. "The bottom line is we are
happy how well thirgs are going for your banks. But we hope you will keep on
top of these issues."
'Ihe financing of leveraged buyouts is becoming popular among financial
institutions, and the extent to which individual institutions are exposed
will be scnrtinized by FDIC examiners, Mr. Seidman said. He noted that LBOs
represent almost 10 percent of all connnercial loans at some major banks--a
lending concentration that may become a major risk to the financial system
during an economic downturn.
"'Ihis is certainly an area we. all need to pay closer attention to, " Mr.
Seidman said. Bank lending for LBOs now stands at about $150 billion, or
about one-half of the LBO debt assumed by corporate America.
"LBO lending has filled the gap in loan demand for many banks created
by the near-disappearance of what had been three major markets:
energy-related lending, certain real estate lending, and loans to
lesser-developed countries," Mr. Seidman said. He acknowledged that LBO
lending has been profitable, but he added that it also "poses significant
risks if in an economic downturn borrowers no longer have the cash flow to
support their debt."
A recent survey of 1,500 corporations conducted by Princeton University
indicated that about 150 of the respondents could go bankrupt during an
economic downturn due to unserviceable debt. "To the extent these
bankruptcies result in bank failures, these problems will end up on the books
of the FDIC," said Mr. Seidman.
###